Gas prices continue to rise across the country as we head towards Memorial Day and summer.  With average prices creeping up to the $3.50 mark you’d think gas prices would start dropping due to lowered demand as Americans cut driving.

But there’s three problems with that theory.

One, oil continues to be priced in falling US dollars, and this gives OPEC all the excuse it needs to refuse to increase production.

The Organization of Petroleum Exporting Countries sees no need to raise oil production to counter high oil prices, the OPEC President said on Sunday.

“No,” said Chakib Khelil, who is also Algeria’s Energy and Mines Minister, when asked by reporters whether OPEC would raise production. “I don’t think that any increase in production will have an impact on prices.

There is a balance between supply and demand,” he said, speaking during a visit to Kuwait. “Even if we raised the production we may not find a buyer,” Khelil said.

He added a previous output increase had failed to bring prices down.

“We raised output last year and there was an increase in prices not decrease.” A falling dollar was a main factor behind the surge in oil prices, he said.

“The decline in the dollar is having a direct impact on oil prices … When the dollar is declining by 1 percent, the oil prices will increase by about 4 dollars,” Khelil said.

U.S. crude hit a record high of $117 a barrel on Friday.

Khelil said OPEC wanted an “appropriate” price, suiting both consumers and producers, but declined to say what that price level would be. “What is appropriate for buyers and sellers,” he only said.

As the dollar continues its free-fall, the price of oil increases almost immediately.  That in turn gets reflected by Bush’s oil buddies, who continue to report record-smashing profits in the tens of billions of dollars.

Bush’s rush to deregulate the oil industry led directly to this level of unadulterated corporate greed, and that’s reason number 2 why you’ll be paying this much for gas from here on out.  The oversight-free, deregulation mindset of 7+ years of Bush have created the world’s most profitable and powerful companies.

Two months ago, ExxonMobil reported a $40 billion yearly profit.

The government’s not interested in lowering prices.  OPEC’s not interested in lowering prices.  Energy giants aren’t interested in lowering prices.  And the rest of the world?

Well, actually, the rest of the world has now passed the US in oil demand.

Traffic jams in Beijing and humming air conditioners in Dubai are replacing U.S. highways and suburbs as the driver of global oil prices.

China, India, Russia and the Middle East for the first time will consume more crude oil than the U.S., burning 20.67 million barrels a day this year, an increase of 4.4 percent, according to the International Energy Agency in Paris. U.S. demand will contract 2 percent to 20.38 million barrels daily, the IEA says.

Economic growth of more than 8 percent in China and India, coupled with increasing car ownership among the countries’ combined populations of 2.45 billion people, will more than compensate for falling U.S. demand. Oil use worldwide will increase 2 percent this year because of growth in emerging markets, the Paris-based IEA says.

“Does the U.S. matter anymore?” said Mike Wittner, head of oil research at Societe Generale SA in London. “Has the U.S. mattered for the last few years? It is debatable. As far as the oil market is concerned, demand growth is going to be continued to be driven by China and the Middle East.”

The rising oil price will benefit Exxon Mobil Corp., BP Plc and Royal Dutch Shell Plc, while punishing a U.S. airline industry that recorded four bankruptcies in a month. Higher energy costs will push up food costs at a time when corn and rice are close to new highs.

Crude oil futures jumped to a record $117.05 a barrel on the New York Mercantile Exchange today, more than twice the level of three years ago.

So, not only should you get used to paying $3.50 a gallon at the pump, but you should be ready to pay even more later.

CIBC World Markets, Societe Generale and Barclays Plc say oil prices are heading higher because of increasing fuel consumption in emerging markets, regardless of a U.S. downturn.

“The U.S. recession will be a footnote as far as the oil market is concerned,” says Jeffrey Rubin, chief economist at CIBC World Markets Inc. in Toronto, who has correctly forecast higher oil prices since 2000. “Supply isn’t growing and demand is growing robustly in the developing world.”

Oil will average $120 a barrel for all of 2008, compared with almost $98 in the first quarter of the year, and reach $150 “by the end of the decade,” Rubin said.

$150 a barrel oil would be roughly $5 a gallon if not more.

A massive inflationary pressure in a falling dollar and massively rising oil prices versus a massive deflationary pressure in the housing depression and falling demand.  Which one will win out and dominate the economy?

Because no matter which side wins, we all lose.

Be prepared.

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